Why UK mortgage holders would do well to overpay their mortgages

Rose · #1 (**permalink**) 02-13-2010, 01:17 PM

In the UK there is no such thing as handing in your keys and writing off your mortgage debt. You are personally liable by law. So if you hand in your keys, and the mortgage lender sells the house for less than your mortgage, you are still liable to pay the difference - so you end up with debt and nowhere to live.

The best thing to do if you have a job at the moment, is to check the terms and conditions of your mortgage and see if you can overpay it. This reduces the capital quicker, which means that overall the interest you pay is less.

Why does this help? Well if you lose your job, you have to wait 13 weeks till the government helps you with the interest portion of your mortgage. During this period, you should be able to persuade your lender to allow you to go interest only to reduce your payments - and the lower your capital, the lower the interest payment. So if you overpaid while you had a job, the payments when you go interest only are lower than if you hadn't overpaid.

Also - you might want to remortgage, to get a better rate (fixed rates are dropping). But the best rates are when your loan to value is 75% or less. So overpaying the debt now could help you secure a better rate.

Further, if interest rates rise, mortgage payments will go up if you are on a variable deal. But as interest is only charged on capital outstanding, the more you have overpaid, the less you will pay in interest.

We are in an unusual period of very low interest rates. But this won't last. By the end of this year, interest rates will start to rise - which means variable mortgage holders will face a hike, and fixed rates on offer will rise too. So prepare by overpaying as much as possible now, while rates are low.

Just my tuppence!

brian · #2 (**permalink**) 02-22-2010, 06:55 AM

Very much agree - been over paying like mad as well.

Rose · #3 (**permalink**) 02-22-2010, 08:12 PM

Quote:

Originally Posted by brian

Very much agree - been over paying like mad as well.

Me too. I slacked off a bit in December (had Christmas to pay for), but am worried about the inflation that seems to be building. I'm sure it will force the BoE to raise interest rates sooner than later, so am back to overpaying like mad to get the capital down.

sapphirecapital · #4 (**permalink**) 02-23-2010, 01:05 AM

why not building up capital instead of overpaying, a good history is fine for discussing matters with the mortgage lender but cash talks louder

Rose · #5 (**permalink**) 02-24-2010, 03:47 PM

Quote:

Originally Posted by sapphirecapital

why not building up capital instead of overpaying, a good history is fine for discussing matters with the mortgage lender but cash talks louder

Well the main reason for overpaying is that the capital you owe is reduced, and hence the interest you pay is reduced.

Say you overpay your mortgage by £1000, and your mortgage interest is 2%. By overpaying, you are saving £20 in interest this year. If you kept the £1000 in a savings account instead, you would probably earn just 0.5% in savings interest, i.e. you would earn £5. And because you hadn't overpaid your mortgage, you would still be paying £20 in interest to the lender.

So by overpaying, you save £20, but by keeping the cash in the bank you lose £15 (you gain £5 but lose £20 in interest you pay on your mortgage).

Remember that everytime you make an interest payment to a lender you are losing money, essentially you are transferring wealth from yourself to the bank.

It's always cheaper to overpay debt as the interest charged on debt is always higher than the interest you gain in savings.

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